Determinants and Consequences of Tax Service Provider Choice in the Not-for-Profit Sector

Abstract:     
This study examines the determinants and consequences of tax service provider choice among not-for-profit (NFP) organizations. Understanding how clients choose among professional services firms for tax services is important both because of the economic significance of tax service revenues to public accounting firms and because of regulatory changes to the market for tax services following the Sarbanes-Oxley Act. Because public accounting firms compete with law and consulting firms for tax clients, we examine whether factors that influence the organizational structure of professions – client proximity and knowledge availability – influence clients’ decisions to purchase tax services. Using data from the U.S. NFP sector where the decision to purchase tax services is observable for all organizations, we find that NFPs are less likely to retain their auditor for tax services as knowledge availability and distance to the auditor increase. We document that self-preparing NFPs are more likely to misreport executive compensation on their return, and we find no differences in misreporting between auditor and non-auditor paid preparers. Finally, we find that NFPs receive lower donor contributions after changing from paid preparers to self-preparing the Form 990.

Number of Pages in PDF File: 66

Keywords: Tax Provider Choice, Non-Audit Services, Nonprofit Organizations, Donor Contributions

JEL Classification: M40, M41, M42, M49

working papers series